Death Match: Simple vs. Compounded Interest

Death Match: Simple vs. Compounded Interest

YW - Jason Hartman Income Property InvestingFor a while now, Jason Hartman has had a sneaking suspicion that American financial literacy is not what it used to be. Blame the brain suck of video games, YouTube, and Snapchat if you like. The truth was painfully revealed in a recent three-question quiz put together by two curious economists. The result was that U.S. respondents were able to answer all questions correctly at a dismal 30 percent clip.

That’s bad, but at least we’re not Russia, who clocked in at 4 percent correct.

But with the best performing nations (Germany at 47 percent success and Switzerland at 50 percent) barely able to muster correct answers by half the population, it’s no wonder the global economy appears to be run by incompetents.

Are you ready for a lesson in humility?

We’ve provided the exact quiz below used by the two economists. Go ahead. Take it and see you do. We’ll wait. Answers are provided at the bottom.

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow? A) more than $102; B) exactly $102; C) less than $102; D) do not know; refuse to answer.

2. Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy A) more than, B) exactly the same as, or C) less than today with the money in this account?; D) do not know; refuse to answer.

3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know; refuse to answer.

The truly scary thing, as alluded to by Lusardi and Mitchell, is that technology has brought financial markets directly to the lap of the small investor. With hardly any effort at all you could trade currency, bonds, mutual funds, stocks, stock options, or commodities – likely without much success it would seem, judging by the results of the quiz.

The real problem is that the average consumer finds him or herself in the position of being taken advantage of by the growing spectre of alternative financial services like payday loans, pawn shops, car title loans, and rent-to-own. Without a basic understanding of how interest works, a consumer could get into serious financial trouble in short order.

Good luck out there! (Image: Flickr | HelenCobain)

* Quiz Answers: (A,C,B)

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The Young Wealth Team